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Some Lessons We Learned About Cash Flow Forecasting

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When starting our accounting firm about five years ago I never realized that we would have front row seats on one of the most interesting economic roller coasters in the world. Living in Calgary, Alberta, Canada, a global economic leader in (and hinged on) oil and gas, we saw our local economy boom, bust and bust again.

To put some context around the situation for those that don’t follow the industry, in a five year span oil traded from a high of USD$110 per barrel to a low of USD$30. Later in 2018, due to pipeline constraints and regional pricing differentials, local oil and gas companies were getting USD$6 per barrel (some even experienced negative pricing).

One could imagine the toll this massive decrease in revenues created for our local economy (and kudos to the Alberta Government for the cool economic dashboards creating this info):

  1. Bankruptcies rose by 54%
  2. Unemployment rates doubled, going from a low of 4.4% to a high of 9.1%
  3. Employment Insurance (government assistance to those who lost their jobs) recipients more than tripled, going from a low of 29,000 per month to a high of 107,000

Some of these stats might not wow others, but relatively speaking, times were, and still are, tough here. Especially for small businesses.


School of Hard Knocks

Of course, this article isn’t a discourse into the plight of our local economy. The above is simply to provide greater context around an often discussed topic in accounting, especially to those living in the SME space: cash flow.

Cash flow to our energy related clients became a massive topic in this environment. We had to actively manage bank balances four to eight months out, in line with expectations around revenue changes, layoffs, contract disputes, bad debts, line of credit adjustments, etc… all just to ensure our client’s basic survival.

So what did we learn while doing this?


Lesson 1 - Cash Flow Forecasting is Simple

Wait, what?

Yes, you heard me, cash flow forecasting is simple… at least in concept. It’s why the vast majority of accountants and bookkeepers I talk to still use spreadsheets for forecasting. Take your bank account, then chronologically add cash inflows (accounts receivable, new sales, etc.) and deduct cash outflows (accounts payable, new expenses, debt payments, etc.). Done.

Excel and Google Sheets can do amazing things in the right hands. Our spreadsheets auto-calculated commissions, adjusted lines of credit based on expected accounts receivable… the list went on.



Lesson 2 - Cash Flow Forecasting is Hard

In reality cash flow forecasting is hard. Especially once you have a client that carries terms (i.e. they aren’t cash based). As an example, one of our clients has an accounts receivable listing that consistently has 100+ invoices on it. Is there an easy way to forecast this in a spreadsheet? Sure is, but it takes time to setup and maintain. You have to determine how each customer pays, apply this logic to each of their invoices and create a method to do this quickly and easily each week (as frequency matters in short term forecasting… life changes quickly).

So at this point you probably ascertain that dumbing the forecast down is a smarter way to work. That makes sense too, but now the forecast is most certainly less accurate. Remember, we are talking about short term forecasting, where granularity matters. Timing of receiving that large outstanding receivable, to the day, could make the difference between missing or making payroll.


Lesson 3 - Cash Flow Forecasting is Hard

Yes, I said it again.

Probably not in the way you are thinking though. We found that the biggest reasons that cash management is hard have nothing to do with forecasting. It’s actually the processes surrounding it. To that point, be prepared to:

  1. Increase the frequency of your work. Monthly bank reconciliations likely won’t cut it for a quality short term cash flow forecast. You need up to date information in order to establish a good starting point, and a lot can happen in one month’s time. Daily reconciliation a la the Will Farnell camp is what you should strive for (Will graciously referred us to this article he wrote for Soldo for an overview of his process). At the least, weekly bank reconciliations.
  2. Focus on completion. Ramping up frequency is one thing, but it is meaningless if the work is not complete. Simply attempting to do a bank rec once a week won’t accomplish anything outside of making yourself work harder. You actually need to be able to fully complete the bank rec each time you carry it out.
  3. Establish different procedures with your clients. In order to accomplish more frequent and complete reconciliations your going to need ALL of your data faster. Our firm has always utilized awesome apps like HubDoc and Receipt Bank, but we had to become much more diligent about how we trained our clients to use them.
  4. Communicate with your clients more. Trying to accomplish tasks quicker and to a greater degree of completion you will just simply have to dialogue with your clients more. Questions around expense receipts will arise, issues with sales invoices will need to be rectified more quickly. This will require more frequent communication to complete.

As a side, the extra work put in above will have some great unintended off-shoots. In our firm, we found:

  1. Month end reporting and analysis became faster and easier. All the data was where it was supposed to be and needed to be, and sooner.
  2. Client buy in to the overall system was greater. With an emphasis on something other than just completing the “necessary evil” that is accounting and bookkeeping, we found clients took greater ownership over their part in the process. The simple task of taking a picture of a receipt now had added purpose: less sleepless nights.
  3. Greater client insights were gleaned over time. With more frequent communication, quicker receipt of data and higher client buy in, we naturally ended up just knowing more about them. This allowed us to build better relationships, greater loyalty and perceived value.


Lesson 4 - More Clients Want Cash Flow Forecasting Than You Think

Our initial cash management efforts were focussed on our energy related clients. While they were only 10% of our total base, they simply needed the additional attention and love. Over time though, we discussed these efforts with our other existing clients and all new incoming leads. Every single one wanted the same service. Yes, you read that correctly. Every. Single. One.

The realist in me would surmise that this number is abnormally high. Likely due to our local economy, and likely due to us getting referrals from clients raving about how great our cash management offering was. Like begets like so to speak.

But the point is that a lot of accountants and bookkeepers I talk to don’t know how many of their clients want cash flow forecasting or cash management, and I would venture to guess that they are greatly underestimating the number. I know we are always shocked at how well cash management resonates with small business clients in terms of service offerings, but it does make sense.

A study by QuickBooks in June 2018 provides some interesting insights here. In this study 900 entrepreneurs were asked specifically about late payments by customers. 59% experienced late payments in some way, shape or form. This number is amazing in of itself, but the real gem was in how these individuals described the impacts of late payments on their lives. Out of the top three descriptions were these two:

  • Causes significant stress (tied for first with 30% of respondents describing this)
  • Keeps me up at night (third place with 24% of respondents describing this)

You often hear about bookkeepers and accountants referring to themselves as marriage counsellors and the above qualifies why. The sheer psychological impact cash flow has on small business owners’ psyches is significant and this translates directly into their personal lives.

Joe Woodard has quantified similar findings in a recent podcast by asking advisors he knows to complete the following sentence as if they were clients: “don’t sell me accounting services, sell me…”. One of the common responses received has been “psychological health”.


Lesson 5 - Cash Flow Forecasting Is Hard... to Scale

One of the last things we found on our journey was a culmination of all of the above. We evolved as a firm. We tweaked our practices and processes and trained our clients (we are still doing this and always will be, to be honest… constant evolution). We realized the market was bigger than we thought.

The remaining problem was that we couldn’t offer these services to everyone who demanded them using spreadsheets. They were simply too slow for us to use and train staff on, and they often were confusing to our clients.

The solution rested where it often does… in apps. But we’ll save that for another post.